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Freeport's Hard Look At Itself

October 23, 2005

Freeport-McMoran Copper & Gold Inc. () has long been tagged as a human-rights pariah for its close relationship with the repressive Indonesian military. In the mid-1990s, for example, it was linked to horrific acts allegedly committed by the Suharto dictatorship against rebels unhappy about expansion of the company's gold and copper mines on the Indonesian island of Papua. Allegations against the troops included all manner of atrocities, including torturing and murdering protesters, as part of what some critics called a genocidal war against separatists in what was then known as Irian Jaya. Activists accused Freeport of complicity, charging that the New Orleans company's security personnel routinely provided transportation for the Indonesian military.

Freeport has always denied knowledge of abuses, but it has nonetheless engaged in a gutsy human rights review that could become a model for all Western multinationals. In 2003 the company quietly asked an outside nonprofit to conduct an independent audit of its vast Papuan mining complex. A report of the International Center for Corporate Accountability Inc. (ICCA), which examined the 18,000-worker operation, is set to be released on Oct. 17. (The full 133-page audit and Freeport's response, both of which BusinessWeek obtained from the ICCA, will be posted on www.icca-corporateaccountability.org.)

Two years in the making, the report details a raft of problems. Although the egregious military abuses have stopped, the ICCA found lingering issues, from violations of Indonesian laws governing its contract workers to rampant mismanagement of a much-praised fund Freeport started to help local Papuan tribes. Some of the findings even stunned Freeport management. For instance, top execs had no idea that its 700-person in-house security force continues to drive Indonesian military around -- a practice management thought it had stopped after the mid-1990s' outcry, say ICCA officials. The ICCA didn't look into long-standing environmental abuses charges against Freeport.

In a formal reply to the audit, Freeport acknowledged the problems and vowed to address them. "We haven't accepted all the recommendations because some aren't culturally the right way to go about it, but the findings are right," says Stan Batey, Freeport's senior adviser on community relations.

The company's willingness to open up so wide is a major development in the corporate responsibility movement. Certainly, no other global mining or oil company has come close to such transparency, long a key demand by human-rights groups. A few consumer products companies -- such as Nike (), Liz Claiborne (), and Toys 'R' Us -- invite independent scrutiny of their overseas labor practices, mostly through joint industry-nonprofit groups set up for the purpose. But the Freeport audit surpasses these efforts.

Most companies are closed books when it comes to independent scrutiny. A majority of U.S. multinationals have codes of conduct that promise good behavior in these fields, but there's rarely a way of checking up. Freeport's example could set a new standard. "Having third-party accountability like Freeport's is critical to corporate credibility," says Arvind Ganesan, director for business and human rights at Human Rights Watch. His group, which wasn't involved in the audit, has criticized Freeport over the years.

INSTANT UPHEAVAL

Freeport's audit by the ICCA, based at the City University of New York (CUNY), shows how companies that are willing can open up even in the most challenging environments. The sprawling complex in Western Papua includes the world's largest gold mine and the third-largest copper mine. It sits atop a 14,000-foot mountain that gets 300 inches of rain a year. When the mine opened in 1967, there were no roads and fewer than 1,000 people in the area, mostly tribes recently exposed to industrialization. The mine drew in 120,000 people, some from other parts of Papua, others Javanese, brought in by Suharto -- a move Papuans saw as Jakarta's attempt to conquer the former colony. All this thrust the area into modernity overnight. It also caused friction with seven local tribes, and tensions boiled over in the mid-'90s, leading to all the charges.

Freeport responded by vowing in 1996 to quadruple Papuan employment at the mine over a decade. And it set up the Partnership Fund for Community Development, which gives 1% of mine revenues to locals. It will pump in about $25 million this year, bringing the total to $132 million. Freeport later laid out social- and human-rights policies and, in 2003, produced detailed standards.

That's when it brought in the ICCA. It was a surprising conversion for a company headed for years by combative CEO James R. Moffett, who relinquished the title last year but remains as chairman. The ICCA got involved at the urging of Gabrielle K. McDonald, a Freeport director who had served as a judge at the International Criminal Tribunal in The Hague, and of David Lowry, a priest who was Freeport's vice-president for social and community relations until he retired in 2004. Lowry says he started with managers at the mine before asking top execs and the board to go along. "We wanted an outside audit not to please an external audience but to figure out how well we were doing on our commitments," says Lowry.

The ICCA's answer: Performance was good in many respects but deficient in others. The auditors laud Freeport's human-rights training program, given last year to 30% of employees. But interviews showed that 60% of those trained couldn't answer basic questions about the policy. Neither could 60% of security personnel, even though 90% of them had taken human-rights training three times as long as the four hours other employees got.

It was the employee interviews that brought to light the ongoing link to the military. The ICCA demanded to know why 29% of the 60 security personnel chosen were unavailable. Eventually, it learned they were driving for the military, says ICCA founder S. Prakash Sethi, a management professor at the Zicklin School of Business at CUNY's Baruch College. "This was against Freeport's policy and shocked all of us," says Sethi.

Even though the ICCA dug in deep, it still has plenty of work to do. The audit covers about 9,000 employees of Freeport and direct subcontractors. The next stage will cover another 9,000 at secondary suppliers. The ICCA also will monitor Freeport's follow-up plans.

Critics like Human Rights Watch's Ganesan still insist Freeport could have fixed much of what the ICCA found on its own. Even so, Freeport's willingness to be exposed puts it in a class by itself. Other companies facing similar abuse accusations now may need to follow its example -- or explain why they can't while Freeport can.